Coronavirus and Aviation in Eastern Europe

I believe it is fairly safe to say that we all, and especially airline professionals, have been expecting a global econonomic crisis. A series of spectacular bankruptcies, such as Air Berlin, Thomas Cook, Jet Airways and the most recent, flyBe, made it evident that good days would soon be over. What everyone has thought would come one day, happened now, everywhere and with an unprecedented magnitude, catalyzed by the coronavirus outbreak.

Big Guys like International Airlines Group, Lufthansa Group, American Airlines, Delta, United will surely get through the crisis but it does not mean they will not have to restructure. They probably will, and some of them have already announced shrinking their capacity for a few years. Healthy ULCCs, such as Ryanair or Wizzair, are also far from panicking. On the contrary, they might see multiple opportunities once the post-Corona market picture will have been revealed.

Other airlines, with a limited scale of operations or low liquidity records will have the poorest chance to survive as they are today. Norwegian's and Alitalia's situation is believed to be quite dramatic already (not that it wasn't before the outbreak) but other brands, such as TAP Air Portugal or SAS Scandinavian, will also experience a huge strain on their businesses. Let's talk about Eastern Europe though.

How does the Eastern European market compare with the West?

Over the last 3 years, Eastern Europe (excl. Russia) has been the fastest growing aviation market worldwide, measured in departing seats. While global seat supply was growing +5% annualy in 2019 vs 2016, Eastern Europe was more than twice as fast (+11%) and 2.5x faster than Western Europe. In the same time, China grew at +9% per annum. Of the top 10 fastest growing markes in Europe, only 2 were Western European countries (Faroe Islands and Malta, both with a relatively low base).

What also makes Eastern Europe different from Western is that its aviation market is not consolidated. And I mean it. It is not just less consolidated. It is not consolidated, at all. While Western Europe, with the exception of the Nordics, Italy and Portugal, is centered around IAG, Air France-KLM and Lufthansa Group, Eastern Europe capacity is scattered between a number of small-size (or at best medium) carriers. This picture has not really changed for at least 2 years (see my previous article), with the only difference being Adria went bust and Nordica became a ACMI-only operator.

However, chances are very high that the ongoing crisis and its aftermath will change quite a few things...

What can change post-Corona?

Logically speaking, based on their recent performance, network and market share, most of the Eastern European carriers should struggle to survive at all or will need to restructure their operations and strategy.

Ukraine International Airlines will probably be the one that will get the biggest hit. It has been having hard time making ends meet already due to the ongoing Russia-Ukraine political tensions and airspace closure. On top of that Ukraine, despite of having a relatively large population, is characterized by a rather limited and low-yielding demand for air travel. This results in UIA being so dependant on flow traffic, while point-to-point is being more and more exposed to LCC competition. With all that, maintaining Kiev as a hub becomes questionable, especially that the Ukrainian government′s ability to bail UIA out will be limited just as much as its available resources.

Another case includes small airlines that have been struggling to find their spots in the highly competitive environment. Czech Airlines and Tarom, once niche-hub carriers, today maintain tiny networks focusing on point-to-point traffic and so, could be easily replaced by LCC operators. For countries of a size of Czechia or Romania, it seems the scope of local brands might be to wide, and potentially, Smartwings could replace Czech Airlines given its business model, while in Romania, Blue Air and Tarom could merge?

However politically incorrect, there does not seem to be a need for so many brands existing in the Balkans. Air Serbia, Bulgaria Air, Croatia Airlines and Montenegro Airlines are way too small to keep their today′s shape. I would love to see them merge under the defunct Balkan brand, but again, politics...

Air Baltic and LOT Polish Airlines both seem to be well placed to survive however they too will need to improve and restructure. This will include going for simpler fleets and shrinking their networks short to mid term, focusing on their main hubs instead of growing hublets.

However, it is likely Wizzair will be the one that will win the most. With its costs very low and modern fleet, it will be able to maintain its capacity, shrinking some markets that will see a slow-down, while expanding into new markets, that will likely see large capacity gaps due to other airlines going bust or reducing (such as Ukraine, Poland, Czechia etc.).

How can Corona impact the largest market in CEE, Poland?

LOT Polish Airlines will need to restructure, again. It has been growing at +20% CAGR over last 3 years, which is really a lot. This has led their fleet to become a mess - only Airbus airplanes missing. Now they will finally have a chance to retire smaller Embraers and DH4s, replacing them with larger. ex-Azul E95s. Hopefully they will also get rid of their Budapest base, which never made any sense, and neither has made any money.

With decreased scale and a leaner fleet, they will be able to focus on their core, which is Warsaw hub, taking advantage of market gaps left from other airlines in the region. This would also give them a chance to stabilize their long-haul operations with own B787 fleet rather than costly ACMIs, and grow in the US/Canada as North American carriers are likely to shrink Eastern European capacity due to fleet reductions (for example American Airlines has already announced retiring its B767s while Air Canada would probably have to re-think its Rouge concept).

Going a level up, it seems that LOT′s owner, Polish Aviation Group (PGL) will not be taking over Condor after all, which, given the current circumstances, would not be a great idea anyways. Coronavirus aftermath and global recession will make demand for leisure travel shrink, and so, Condor′s business model might become questionable just as Thomas Cook did. PGL is better off keeping their cash and making sure LOT stays afloat.

Last not least, the new airport for Warsaw (CPK) project will probably get parked for some time, as the government might need to spend more on rescuing the economy rather than building a huge airport - the project will need to be reassessed and its initial phase, potentially scaled down... I still believe it makes sense to go forward and build it, as it is a long-term investment, however there is one important caveat - LOT needs to survive. It does not make any sense to build a hub without a relevant hub-carrier.

To sum up, I am certain there will be multiple changes in Eastern Europe. Changes that were long awaited. However harsh and unfair they might see, I believe consolidation is a must and it is high time for Eastern European market to mature.

As always, looking forward to your views!